October 5, 2009
Re: File # S7-18-09
I am writing as a licensed broker dealer to strongly oppose proposed Rule 206(4)-5 which will make it even harder for minority and women investment professionals to manage pension money. Driven by the publicity around an influence-peddling scandal in New Yorks public pension system, the proposed regulation forbidding the use of all placement agents by investment firms seeking to do business with public pension funds is a classic case of throwing the baby out with the dirty bath water. If approved, the regulation will have a direct, negative impact on investment returns of millions of Americans. Equally troubling, the regulation would set diversity within the investment community back decades.
The regulation would further concentrate assets with a small group of large, elite, predominantly white, male dominated firms-- exactly contrary to what drives higher, more robust investment strategies and returns. Without placement agents, the ability of emerging asset management firms, the majority of which are minority- and women-owned firms, to gain the business of the large public pension funds becomes virtually impossible. Yet, it is these very firms that consistently deliver higher returns than their larger, more established competitors. This regulation flies in the face of the SECs stated objective to level the playing field.
In the proposed rule, the SEC states that because of apparent difficulties for advisers to monitor the activities of their third-party solicitors, we are proposing to prohibit investment advisers from using third-party solicitors to obtain government clients. Placement agents pose no threat in fact, they provide a much-needed service on behalf of many minority- and women-owned investment firms unable to afford their own in-house marketers. The irony of this position is that the SEC currently monitors the activities of broker/dealers (placement agents) through FINRA and requires disclosure of all fee arrangements. It is not necessary for investment advisors to further monitor the activities of already regulated placement agents. Placement agents can easily verify to FINRA and potential managers they have made no political contributions to influence decisions.
The role of the placement agent appears simple and straightforward: to act on behalf of an investment firm and secure an opportunity for the firm to present its services. Behind the scenes the tasks are more complex. Placement agents are investment marketing experts who assist clients and their legal counsel on marketing materials and PPMs, presentation scripts, and sales strategy. They make all introductory contacts and presentations, screen all prospects, handle all follow-ups, and assist until fundraising is successful. Agents are paid a fee transactions are transparent and known to the pension funds.
But scape goated by the posturing and proclamations of political candidates in New York and elsewhere, third-party marketers have become synonymous with unethical pay-to-play activities. While isolated, egregious pay-to-play activities have been documented and must be addressed, the proposed regulations prohibiting all agents from working on behalf of the finance industrys emerging businesses is misplaced and discriminatory.
In industry after industry, increased competition among providers drives innovative thinking, more diverse choices, and better outcomes. The finance industry is no different. And, based on research from Harvard University and others, it is emerging managers, not the mega firms poised to profit from the proposed SEC regulation, that consistently produce higher rates of return on investments.
Currently, the largest 100 asset management firms control 86% of global institutional assets. Under the proposed regulation, this concentration is likely to increase further as small, emerging companies will find it increasingly challenging to market their investment products to pension funds. This concentration is troubling and does not serve the constituents the SEC is attempting to protect—the public pension funds.
In fact, if the regulation were to go into effect, principals at emerging manager firms would likely take on the additional, time-consuming task of marketing their firms. Most in the industry would argue that these principals time is best spent concentrating on their core business: managing assets, not marketing services.
I have focused on the careers of minority investment professionals for over twenty years. This proposed regulation would make starting their own investment firms without the sponsorship of one of the Wall Street giants virtually impossible.